The Effect of Foreign Service on Trade Volumes and Trade Partners

40 Pages Posted: 29 Apr 2008

Date Written: 04/28/2008

Abstract

It has been emphasized that international promotion activities such as state visits or the presence of embassies, consulates and export promotion agencies help foster trade when there are search costs and/or uncertainty. In this paper we try to disentangle the differential effect that foreign service (embassies and consulates) has on both the establishment of trade links with countries, and the effect on trade volumes with already existing trading partners (the extensive and intensive margins at the country level). Using the estimation procedure suggested by Helpman, Melitz and Rubinstein (2007) and a cross-section of 21 exporters and 162 importers as in Rose (2005), we find that the presence of a foreign service office in a given country increases the probability of trading with that partner between 11% and 18%, but that it has no effect on the volume of trade with already existing trading partners. We then proceed to evaluate the importance of the extensive margin at the sectoral level, finding that these probabilities are substantially larger for more differentiated sectors.

Keywords: Foreign service, uncertainty, extensive margin, intensive margin, gravity

JEL Classification: F12, F13, F15, F55

Suggested Citation

Segura-Cayuela, Ruben and Vilarrubia, Josep M., The Effect of Foreign Service on Trade Volumes and Trade Partners (04/28/2008). Banco de España Working Paper No. 0808. Available at SSRN: https://ssrn.com/abstract=1126598 or http://dx.doi.org/10.2139/ssrn.1126598

Ruben Segura-Cayuela (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Josep M. Vilarrubia

Banco de España ( email )

Madrid 28014
Spain

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